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Northland Capital upbeat on Telit Communications as Novatel moves into M2M sector


Telit Communications (LON:TCM) has demonstrated much greater revenue velocity than the market and it has secured a larger percentage of design wins than its market share, according to Northland Capital analyst David Johnson.

The brokerage, formerly known as Astaire Securities, published research on the company that centred on the recent spate of mergers and acquisitions in the Machine-to-Machine communications sector.

Most recently Novatel Wireless (NASDAQ:NVTL) bought privately-held Enfora for up to US$70 million.

Northland highlighted that Enfora was ranked as the 4th largest player in the sector in 2009, with 5 percent of the market - behind Telit with 12.4 percent, Sierra Wireless (NASDAQ:SWIR) with 26.3 percent and Gemalto’s (EPA:GTO) Cinterion unit, which leads the sector with 28 percent.

“The M2M market has undergone a period of considerable consolidation with three of the four largest suppliers having now changed hands and there is scope for further activity,” Johnson said.

“This reflects the realisation by early providers that came from a consumer networking background that dynamics of M2M are different but also an attempt by network module providers to access a less commoditised market.” 

The analyst highlighted that the Novatel-Enfora deal has an acquisition multiple of around 1.1x historic revenues, which is in line with earlier transactions.

He noted that this is a significant premium to Telit’s current rating - 0.8x enterprise value / trailing 12 month revenues.

“Applying a 1.0x revenue multiple to Telit’s FY11 revenues would suggest a share price 125p, equivalent to FY11 PER of 16.3x,” Johnson said.

Furthermore the analyst believes that Telit’s business could command a premium rating, compared to Enfora.

“There are significant differences in Enfora’s operations, however, that would suggest Telit would support a premium rating.”

A large proportion of Enfora’s revenues relate to device sales plus software ... these offer better gross margins but arguably these revenues are less scalable.”

“Telit has demonstrated much greater revenue velocity than the market and secured a larger percentage of design wins than its market share  .... This suggests it will continue to grow revenues faster than the market over the next three to four years.”


Quick facts: Telit Communications PLC

Price: 128.4 GBX

Market: AIM
Market Cap: £167.19 m

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